California faces another massive deficit

November 18, 2009 2:28:46 PM PST

SACRAMENTO, CA --

California will face a nearly $21 billion budget gap over the next year and a half, extending a fiscal crisis that already has led to steep cuts to public schools, social services and health programs, a state analyst said Wednesday.

The projected deficit amounts to nearly a quarter of the state's $84.6 billion general fund budget.

In his report, Mac Taylor, the Legislature's nonpartisan budget analyst, pinned the blame on the deep recession and poor decisions by Gov. Arnold Schwarzenegger and state lawmakers during the past year.

Many of the steps they said would patch previous budget deficits have failed, creating a $6.3 billion hole in the current fiscal year ending June 30.

Taylor said lawmakers should consider extending temporary taxes such as the 1 percent vehicle license fee while seeking longer-lasting and more realistic budget cuts.

They also should could go back to voters with a straightforward request to untie legislators' hands when it comes to cutting currently protected mental health and early childhood development programs.

"We did a lot of one-time stuff and I think we just have to make sure our solutions are real," Taylor said.

The shortfall will expand to $14.4 billion for fiscal year 2010-11, forcing state leaders to make even more painful cuts, he said.

The report does, however, suggest California's economy is on the mend, but analysts don't expect it to recover for another year or two.

A thriving economy sends more sales, capital gains and income taxes to the state. With a steep downturn, tens of billions in tax revenue evaporates.

Schwarzenegger said he does not think the state should raise taxes, despite the widening gap. He was in Italy on Wednesday to encourage regional governments to take action on climate change.

Democratic leaders who control a majority of the state Legislature indicated they would look to taxes to help bridge the gap.

"We look forward to receiving the governor's new budget proposal in January and will immediately begin work on crafting budget solutions that will once again require both difficult spending reductions and additional revenues," said Assembly Speaker Karen Bass, D-Los Angeles.

Assembly Republican Caucus Chair Cameron Smyth, R-Santa Clarita, said members of the minority party -- whose votes are needed to muster a two-thirds majority to pass a tax increase -- have no appetite for such hikes.

"This deficit will not be solved on the backs of California taxpayers," Smyth said in a statement.

The options for Schwarzenegger and lawmakers are limited to spending cuts, higher taxes or borrowing. Tax cuts and borrowing appear to be in disfavor after taxes were raised earlier this year and tens of billions of dollars were added to the state's credit card during Schwarzenegger's tenure.

Unless the governor and lawmakers reprioritize spending and add revenue, the state will face $20 billion deficits each year through 2015, Taylor warned.

The largest shortfall is projected to be $23 billion in the 2012-13 fiscal year, when the state must pay back billions it borrowed from local governments to cover this year's deficit.

The report urged the Legislature to develop a long-term budgeting plan. Otherwise, California will teeter near the brink of insolvency as it did earlier this year when it had to issue IOUs, the report states.

What happens in California tends to serve as a bellwether for the rest of the country. A study released last week by the Pew Center on the States warned that at least nine other states -- Arizona, Florida, Illinois, Michigan, Nevada, New Jersey, Oregon, Rhode Island and Wisconsin -- face similar economic peril.

The Pew report warned of higher taxes, more government layoffs or deep cuts in services in those states.

Since February, California has made nearly $60 billion in adjustments over two fiscal years. Those have taken the form of cuts to education and social service programs, temporary tax hikes, and adding money from the federal stimulus package.

Wednesday's forecast said California will not be able to achieve savings from many of its earlier steps involving prison reform and tapping into transportation funds.

Additional legal challenges could drive the projected $21 billion deficit even higher. For example, the governor's order to furlough more than 200,000 state workers three days a month is being challenged by unions.

Schwarzenegger had previously estimated that California would run a deficit of $12.4 billion to $14.4 billion when he releases his next spending plan in January.

"We think the (legislative analyst's) report is a realistic assessment of the gap the governor and Legislature are going to have to close," said H.D. Palmer, spokesman for Schwarzenegger's finance department.

By early December, he said, finance officials will give the administration a number of options to close the deficit.

Schwarzenegger has warned the toughest cuts are still ahead because the state's temporary tax increases will begin to expire at the end of 2010, while federal stimulus spending will begin to run out a year after that.